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Analysts consider that a weak yen may be in Asia's best interest

By William Pesek Jr.
BLOOMBERG, TOKYO
Thursday, Nov 22, 2001, Page 19

If there's anything the outside world knows for sure about Japan, it's that a strong yen is bad for the world's second-biggest economy. A firm yen makes Japan's goods too expensive overseas and hampers growth.

Trouble is, a weaker yen forces neighbors to drive down their own currencies to compete. Such a wave of competitive devaluations, observers worry, could destabilize already fragile Asian economies. Thus, the yen can't go too low.

Now for an alternative view: Instead of being bad for Asia, maybe a weaker yen would help. Before dismissing this idea out of hand, consider a recent report from two International Monetary Fund economists. It turns the conventional wisdom about Japan's currency strategy on its head.

The theory is that while Asia fears a weaker yen, the end -- namely, a rebound in Japan's economy, by far the biggest in Asia -- justifies the means. If Japan were to begin growing again, neighbors like Malaysia, Singapore, South Korea, Taiwan and Thailand would benefit from the revival of what traditionally has been Asia's biggest market. Giving Japan room to boost its economy, the theory goes, could pay off for Asia in the long run.

Just about every option Japan has to boost its economy involves a weaker yen. For example, if Prime Minister Junichiro Koizumi's plans to rapidly tighten Japan's fiscal policy are implemented -- which seems increasingly unlikely -- the yen would probably fall along with borrowing costs. The same is true if the Bank of Japan gives in to pressure and aggressively pumps up the money supply.

Tokyo, trying to avoid drastic medicine for Japan's illness, has spent considerable time and energy worrying about the yen's value versus the dollar. The US currency rose back above ?123 this week, from 120.86 a week ago. Japan has intervened in currency markets myriad times and talks down the yen almost daily.

It's Tokyo's short-term solution to Japan's 11-year malaise and it's not working.

What if Asia blessed Japan's desire to go all out to weaken the yen? What if it engaged in massive yen selling and convinced the Bank of Japan to print lots of currency? These questions are among those the IMF paper, written by Tim Callen and Warwick McKibbin, looks to answer. One of its conclusions is that a significantly lower yen may not be the disaster many Asian leaders fear.

While officials in Bangkok, Beijing, and Seoul may shudder at the thought, the devalue-the-yen idea may have some merit. After all, Tokyo seems to have tried everything else. Massive bonds issuance, ambitious public works spending and zero interest rates.

None of the efforts has worked.

For now, Asian fears over a weaker yen remain a constraint on Japan's latitude to export its way out of recession, says Mansoor Mohi-Uddin, a Singapore-based currency analyst at UBS Warburg.

That's because of the strong linkages between Japan's foreign exchange policies and rest of Asia.

In the early 1990s, for example, a rising yen led to strong foreign direct investment into the rest of Asia as Japanese companies went offshore to maintain cost competitiveness. Also, Japanese bank loans to the region surged during the period, in part to finance the new local subsidiaries that Japanese investment was creating.

In the late 1990s, a softer yen -- coinciding with Japan's banking troubles and Asia's own economic crisis -- led to less Japanese foreign direct investment and bank loans to Asia. All of this means trade linkages between Japan and the region are substantial, Mohi-Uddin points out.

Japan became increasingly reliant on Asia as a market for its goods and services during the last 15 years. Asia -- especially China, South Korea and Taiwan -- is now the largest destination for Japanese exports. It's not hard to see how a weaker yen has enabled Japanese companies to penetrate Asia's economies.

Asia's interconnectedness with Japan means that in the short run, a depreciating yen may be a negative. In the longer run, however, the IMF paper finds that Asian economies could gain, thanks to lower capital costs. Cheaper capital may more than offset the trade lost from a weaker yen.

Healthier growth in Japan could give a major boost to Asia's export markets. As a result, equity markets throughout Asia could begin to rise as investors bet on increased exports to Japan. If a much weaker yen can help bring about this result for Asia, perhaps it's worth a try.
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